Fiscal framework: Government studies limiting investment – 03/31/2023 – Market

The Secretary of the National Treasury, Rogério Ceron, said this Friday (31) that the government is considering limiting the size of bonuses for extra investments in the new fiscal framework presented by the government of Luiz Inácio Lula da Silva (PT).

The lock would prevent a massive inflow of revenue from ending up generating an exaggerated bonus to be used in public investment spending.

In a live promoted by Warren Rena, Ceron also denied that the new framework requires an increase in the tax burden so that the government can deliver the promised improvement in the accounts.

The model’s high dependence on revenue growth has been one of the main points of criticism from economists regarding the government’s proposal. The Minister of Finance, Fernando Haddad, promised to announce a new package of measures in the next few days to expand revenues by up to R$150 billion.

“I don’t agree that the tax burden will go up a lot,” said Ceron. The secretary again criticized the decision of Jair Bolsonaro’s (PL) management to grant a series of tax waivers at the end of the government’s lights.

“A significant part of the problem we have is due to a significant waiver we had, 1.5% of GDP [Produto Interno Bruto]”, he said.

“It does not have a significant increase in the tax base as some might imagine. We believe that, with some adjustment from the point of view of revenues in relation to what we had in 2022, we are able to balance the country and put it on a sustainable path”, he said. .

The new fiscal framework was presented by the economic team this Thursday (30th) and foresees that the real growth of federal expenses will be limited to 70% of the increase in net primary revenue observed in the 12 months until June of the previous year, as anticipated by the Sheet.

The central principle of the rule is to allow an increase in expenses, but at a slower pace than the increase in revenue. This combination is considered crucial to zeroing out the deficit, improving the situation of the accounts and stabilizing the trajectory of the public debt in the coming years.

In addition, the framework stipulates an annual primary result target, but with an upward and downward tolerance interval —like the inflation targeting system. The primary result is obtained from income minus expenses.

In the proposed design, if the result of the accounts is better than the most favorable scenario (that is, the ceiling of the band), the government would have a bonus to invest in public investments. They would be temporary, funded by excess revenue, and would fall outside the spending cap.

The point highlighted by Ceron is that if there is a massive inflow of revenue into government coffers, the bonus could end up being very large. Therefore, technicians discuss some limit.

“In the bonus discussion, there is discussion about whether we put a cap on it,” Ceron said. “A very extraordinary income generates a very large bonus.”

According to the secretary, the government’s intention is to provide an incentive for the improvement of public accounts —since it would boost investments—, but there is concern that the mechanism “does not have a bad effect at the end of the day”.

On Thursday, when explaining the mechanism, Ceron had cited an example in which 100% of the surplus would be allocated to investments.

“If the surplus passes [da banda superior] R$ 25 billion and R$ 50 billion, in theory you would have R$ 25 billion to boost investment”, he said.

The secretary, however, left open the possibility of discussing a limiter for this bonus. He also stressed that the rule cannot be used to finance mandatory expenses, which would continue to weigh on the Budget even with the end of the extra resource.

In defense of the proposed framework, Ceron said he will correct what is considered an error of the current spending cap: the exclusive focus on expenses. In this way, according to him, tax waivers ended up becoming an escape valve to mitigate political pressures.

The government’s proposal, according to him, combines an expenditure limit with the need to pursue a primary result —that is, the economic team cannot neglect the collection.

“When you tie the three pieces together, you don’t let expenses grow uncontrollably, you remove the incentive to forego revenue and look at the result in the medium term, creating a healthy environment for conducting fiscal policy,” he said.

The secretary was also open to discussions and considerations made by the financial market, which viewed some of the government’s projections with some skepticism. The delivery of a surplus of 1% of GDP in 2026, for example, was considered optimistic by some agents.

Ceron still left the door open to discuss the calibration of some of the rule’s parameters, such as the 70% percentage that links growth in expenses to higher revenues.

“This is a discussion of adjustment intensity. Bearing in mind that 70% is a limit, it is a maximum. When you set 60%, I am making movement choices, intensifying the adjustment process and, on the other hand, stimulating revenue growth,” he said. Ceron.

“The design itself is making sense to everyone, everyone understands the direction of movement.. The discussion is whether the intensity is adequate and whether we will be able to deliver the primary”, he said.